WASHINGTON, Oct. 22 (Xinhua) -- The International Monetary Fund (IMF) on Tuesday said that despite rate cuts and buoyant markets, there are mounting global financial fragilities, urging policymakers to "remain vigilant" about the medium-term prospects.

The newly released Global Financial Stability Report highlighted two areas of concern. For one, accommodative financial conditions have continued to increase vulnerabilities, such as lofty asset valuations around the world, increased government and private-sector debt levels, and more use of leverage by financial institutions, Tobias Adrian, director of the IMF's Monetary and Capital Markets Department, and his colleagues wrote in a blog.

The second area of concern, according to the blog, is the "disconnect" between heightened uncertainty -- especially related to increased geopolitical risks -- and financial market volatility.

"Asset prices may not fully reflect the potential impact of wars and trade disputes. Such a disconnect makes shocks more likely, because high geopolitical tension could trigger sudden sell-offs in financial markets and prompt volatility to snap back as it catches up to uncertainty," the authors argued.

"As the global economy continues to grow, and with monetary policy easing, risk-taking by investors could increase. And thus, vulnerabilities such as debt and leverage could build up, raising downside risks in the future," they said.

The IMF's Global Financial Stability Report urged central banks to push back against overly optimistic investor expectations for monetary policy easing in countries where inflation remains stubbornly above targets. On the fiscal side, adjustments should focus primarily on credibly rebuilding buffers to keep financing costs at reasonable levels.

Noting that more progress is needed on financial policies, the IMF report argued that fragilities created by nonbanks using more leverage and maturity mismatches underscore the need for more active regulatory and supervisory engagement.

In response to a question from Xinhua at a press conference Tuesday, Adrian said that the IMF welcomes the recent easing of monetary policy by the People's Bank of China, noting that the cut in interest rates and engagement in asset purchases have supported the easing of financial conditions.

"The cost of funding for households and corporations in China, those financial conditions have eased quite markedly, equity markets have rallied, longer term bond yields have declined, and we generally welcome that easing," he said. Enditem

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